DUMMERSTON, Vt. -- I have written often over the past few years about the house of cards that is the American economy, but the events of the past week should frighten everybody.

First, there was the collapse of IndyMac, a California bank
deeply involved in subprime lending. The Federal Deposit Insurance
Corp. calls it the second biggest bank failure in its history.

The scene of people lining up hoping to get what's left of
their money is unnerving, especially when you consider that the FDIC
has said that as many as 150 more banks may go under in the next year
or so.

Then there are trials and tribulations of Fannie Mae (the
Federal National Mortgage Association) and Freddie Mac (the Federal
Home Loan Mortgage Corp.), the two federally-chartered companies that
either hold or guarantee half of the home mortgages in the United
States - more than $5.3 trillion.

Fannie Mae was created in 1938 to expand the flow of mortgage
funds across America at a time when millions of Americans risked
losing their homes. In 1968, it was re-chartered by Congress to
become a shareholder-owned company with private capital.

Fannie Mae and Freddie Mac are what's known as secondary
lenders. They buy mortgages from banks and other lenders and package
them into bonds, which they sell to pension funds and other
investment firms. The banks use this money to make further loans to
new homeowners.

Because the loans backed by Freddie and Fannie are considered
low-risk, federal regulators have allowed them to carry smaller
reserves of capital. The standard ratio in banking is $10 of loans
for every dollar of capital. For Fannie and Freddie, the ratio is
closer to $30 for every dollar.

When times were good, Fannie and Freddie weren't needed. Even
though warnings were sounded that they did not have enough reserves,
the federal government believed that house prices would keep going up
and that it was worth the financial risk to promote homeownership.

Fannie and Freddie can't be blamed for the subprime mortgage
debacle, because by law they could only give mortgages to qualified
buyers. Unfortunately, the housing bubble was so inflated that even
the well-qualified mortgage holders who bought at the top of the
market are now facing foreclosure.

Here's where things get tricky. If Fannie and Freddie run
into trouble, investors expect the federal government (i.e.,
taxpayers) to bail them out - a textbook example of modern
capitalism, where the profits are privatized and the losses are
socialized.

The savings and loan crisis of the 1980s was a classic case
of this theory, as these institutions offered high interest rates to
attract investors, then reinvested that money into riskier ventures.
When the bets went bad, it cost taxpayers more than $100 billion to
clean up the mess. That's because those deposits were federally
insured, and the FDIC was obligated by law to come up with the money.

The same guarantee of federal backing is why Fannie and
Freddie became so popular with investors. Even though they sell
stock, they have an extra layer of security that other stocks just
don't have.

So we taxpayers may be on the hook for hundreds of billions
of dollars because of bad bets made on the housing market. But to let
Fannie and Freddie fail would mean huge problems for the U.S.
economy.

That's why the Treasury Department and the Federal Reserve
announced an emergency rescue plan on Sunday to temporarily increase
a long-standing Treasury line of credit that could go to either
company.

The Treasury Department also said it would, if necessary, buy
stock in the companies to make sure they have enough money to
operate, while the Fed announced it would allow Fannie and Freddie to
get loans directly from the Fed. That's something previously done
only for commercial banks, but now a privilege extended to investment
banks and other institutions in the wake of the Bear Stearns collapse
in March.

The hope is that if Freddie and Fannie can be shored up, it
will restore confidence in the financial sector. But the problem that
Fannie and Freddie got sucked into remains - namely that there are
trillions of dollars of mortgages that won't ever be repaid. Those
bad mortgages have been sliced, diced and julienned into top-rated
securities that may be next to worthless.

Now that the housing bubble has burst, nobody knows for sure
what any investment is really worth. That's how deeply the subprime
scam has infected the economy. That's why the ride may get even
rockier in the months ahead.

Randolph T. Holhut has been a journalist in New England for
more than 25 years. He edited "The George Seldes Reader" (Barricade
Books). He can be reached at randyholhut@yahoo.com.